Legal Environment

Contract 5 Consideration Capacity to Contract Intention to Create Legal Relations

Learning Objectives
Quick Review The requirement of consideration What is capacity to contract? How it applies to
Adults Minors People who have a mental disease People under the influence of alcohol or drugs

Intention to create legal relations

Quick Review
A contract is a legally binding agreement In order to create a valid contract which is legally enforceable, there must be an offer and an acceptance

Requirement of Consideration
In addition to an offer and acceptance, we also need consideration in order to create a contract Only contracts made by deed do not require consideration

Requirement of Consideration (cont.)

Basically, one party benefits in some way or the other party is responsible for doing something (or both) Paying (or promising to pay) money in return for the goods or services is the most common form of consideration

Capacity to Contract
In addition to offer/acceptance and consideration, capacity to contract is also needed to create a valid contract Capacity to contract means the ability to enter into a contract Let us see how this applies to different groups of people
6

Adults
All adults of sound mind (ie they are not mad) have the capacity to contract

Minors
A minor is a person who is under the age of 18 years old As they have less experience, the law tries to protect minors from situations where they might enter into contracts which do not benefit them

Minors (cont.)
Contracts with minors can be
Valid Voidable Void

Valid Contracts with Minors

The following kinds of contracts can be enforced against a minor as they are valid contracts: Contracts for Necessaries Beneficial Contracts of Service

10

Contracts for Necessaries

Necessaries are things necessary to maintain the minor The Sale of Goods Act 1979 defines these as Goods suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery
11

Contracts for Necessaries (cont.)

Necessaries includes things like food and clothes It would not include things like jewelry and DVD players and other luxuries The minor is only required to pay a reasonable price for necessaries

12

Contracts for Necessaries (cont.)

What qualifies as necessaries depends on the circumstances of each case If the minor is quite wealthy then quite expensive goods may be necessaries so long as they are useful If the minor already has a good supply of a particular thing (eg clothes) then more of these may not be necessaries even though they are useful and within the minors usual income 13

Contracts for Necessaries (cont.)

The Sale of Goods Act 1979 only applies to goods However, the common law applies to services and it follows the Sale of Goods Act

14

Contracts of Service
A contract of service, apprenticeship (ie training) or education with a minor is valid so long as it benefits the minor Ordinary trading contracts are not valid as the minor may lose a lot of money

15

Voidable Contracts
A voidable contract is binding on the minor unless s/he takes action to declare it void (ie invalid) The minor can do this while s/he is still a minor or within a reasonable time after reaching 18 years old This would apply to contracts to buy shares in companies, leases of property and partnerships
16

Void Contracts
Under the terms of the Minors Contracts Act 1987 certain contracts are void (ie invalid) unless they are ratified Ratified means that the minor confirms that the contract is valid when s/he reaches 18 This applies to loans and contracts for nonnecessary goods
17

Mental Incapacity and Intoxication

A contract made with a person who has a mental disease or who is under the influence of alcohol or drugs is valid unless that person can show At the time they made the contract their mind was incapable of understanding what they were doing, and The other party knew (or should have known) about their disability
18

Mental Incapacity and Intoxication

If the person who is incapable due to mental incapacity/drink/drugs enters into a contract for necessaries then s/he must pay a reasonable price for them

19

Intention to Create Legal Relations

In addition to offer/acceptance, consideration, and capacity to contract, the parties must also intend to create legal relations before there can be a valid contract In other words, a court will only give effect to a contract if it is satisfied that the two parties intended to create a contract which would be legally enforceable
20

Domestic and Social Agreements

Usually, a court will say that there is no intention to create legal relations in domestic and social agreements This applies to agreement between husband and wife, for example And between employees, such as in lottery syndicates Because there is no contract the parties cannot enforce the agreement
21

Domestic and Social Agreements (cont.)

However, it is possible to convince a court that there was intention to create legal relations The best way to do it is to create a formal written document signed by the parties

22

Commercial Agreements
In this type of agreement, a court will usually assume that there was an intention to create legal relations because it involves business One party would have to show that there was no intention

23

Summary Part 1
Parties to a contract must have the capacity to contract Adults of sound mind have the capacity to contract Contracts with minors may be
Valid Voidable Void Depending on the type of contract

24

Summary Part 1 (cont.)

In order to avoid a contract, people who enter into contracts when they have a mental disease or are affected by alcohol or drugs have to show that they could not understand what they were doing and that the other person knew that

25

Summary Part 1 (cont.)

A valid contract also requires that the parties to the agreement had the intention to create legal relations Usually, there is no intention in the case in domestic and social agreements Usually, there is intention in commercial agreements
26

Summary Part 2
A contract is a legally binding agreement In order to create a valid contract, there must be
An offer An acceptance Consideration Capacity to contract Intention to create legal relations

27

Reading
Case 158: The Moorcock Case 182: Alexander v Railway Executive Pages 289-290: Minors Page 291: Mental Disorders/Drunkenness Page 281: Intention to Create Legal Relations

28